Today’s REI Classroom Lesson

REI Classroom Summary

By having it look as if there’s no equity in your personal property, in most cases it will deter creditors from a further look.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Clint: Hi, Clint Coons here with Anderson Business Advisors and host to the REI Classroom. In this segment, we’re going to be discussing equity stripping.

Mike: This show was sponsored by passiverental.com.

Clint: Now, if you’re not familiar with the topic, what equity stripping is designed to do is pull the equity out of your property. Now, of course, there’s many ways we can go about this. We could go to a traditional lender and borrow against the equity in our property. And in exchange for loaning us money, that lender is going to ask for some collateral. And with the equity stripping, what we’ll be doing is giving them our property as collateral so our property then would be encumbered by the lender.
Now, this is going to encumber your real estate regardless if you borrow the money or not. This is a great strategy from the standpoint that if you have real estate with a lot of equity in it and you do not want creditors to know that this property has so much equity, then putting a deed of trust on it or a second deed of trust to hide that equity is a great strategy when it comes to asset protection. Now this can be accomplished inside of land trust, LLC’s or corporations. You just need to find a lender that’s willing to loan against the property.
Now oftentimes, people struggle with this for a couple of different reasons. Number one, they don’t want to get an equity line of credit against their property to strip the equity because it’ll appear on their credit report. So their concern, because they want to keep their credit report high, their credit score, that is, so they don’t want to go out there and obtain a traditional loan against their real estate so they’re reluctant to utilize this strategy. It’s more of “I’ll just let it ride and hopefully, nobody comes after me and sues and is able to attach this equity.”
Well, there’s another way to use this same strategy without using a traditional lender. In fact, you can do it yourself. You just have to set up the proper structure. Now, this structure begins with an entity that is registered in the state where your name is not attached to it. Typically, we use a Nevada or Wyoming limited liability company or corporation that has nominee protections. Nominee protections are those that when we set it up, your name is not associated with the entity. In fact, my partners own over 17,000 entities in Nevada and Wyoming. These are not his entities, but they protect our clients’ identity.
So once you’ve established the entity and it’s set up or your name is no longer attached to it, then treat that entity as a lender. So let’s assume that you have a house, it’s in an LLC and there’s $200,000 equity there, and you want to make it disappear. So if any creditor was looking at that property and thinking, “Hey, I’m going to go after this LLC and I’m going to get that equity,” well, the way we would do it to make it disappear is we’d have the LLC, assume it’s in Texas, we’d have that LLC enter into a line of credit agreement with your Wyoming LLC where your name doesn’t appear attached to it. You then would take the Wyoming LLC and file either a first or second deed of trust against your Texas property that’s held in this Texas LLC. So now, you’re going to encumber that property for the $200,000 in equity that exists.
Now you might be thinking to yourself, “Well, wait a minute, Clint. I don’t have an LLC in Wyoming that has $200,000 cash so how can I set this up? It wouldn’t be considered legal, would it?” Well, absolutely, it works just fine. I mean, think of it this way. If you went to a bank tomorrow and you asked for a $200,000 line of credit and they actually gave it to you against your property, would they give you $200,000 to leave the bank with? No, because they don’t have that type of cash around either.
So when you enter into a line of credit, all you’re agreeing to do is loan someone the money if they ask for it. That’s it. You’re not actually taking the money until you need it. So in this situation where I’m entering into a line of credit with my Wyoming LLC, I’m not anticipating taking the money. I’m just using this as a smoke screen. So I don’t need the $200,000 available because, of course, if I didn’t have it and I requested it and none was given to me, then that $200,000 deed of trust that is recorded against my property is not going to stick because my Wyoming LLC is only going to be able to encumber that property to the amount of money that it actually loaned to me.
So in this situation, you’re in control of both sides. You’re the lender and you’re the borrower. So you decide how much you want to encumber the real estate for, but the intent here is to make it appear as if that property is fully encumbered because we don’t want creditors coming after us because they see a big, juicy target there.
Now, another objection I get, before we utilize the strategy for investor-clients is “Well, Clint, how about if I want to go and get a real loan? Won’t that create a problem for me? Or won’t it appear on my credit report?” The answer is “No way.” Number one, you’re not going to report yourself to the credit bureau. So that’s an easy one. But the second one is that if you do want to go out there and actually borrow and use that property as collateral for a loan, all you have to do is release your interest in the property because, again, you’re in control of both sides.
So equity stripping is a great tool to hide the equity in your property, to make it appear as if there’s nothing worth going after because creating smoke screens, many times, is enough of a deterrent to stop a creditor from bringing an action against you. My name’s Clint Coons with Anderson Business Advisors.

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Mr. Coons is a founding partner of Anderson Law Group and current manager of Anderson’s Tacoma office. After graduating from the University of Washington with a business degree, Mr. Coons began his career in construction. Giving up the hammer for a gavel, he graduated from Seattle University School of Law in 1997.